A significant number of households rely on a single income source to cover expenses. They are exposed to the risk of losing their income and falling into financial hardship. A dependable Annuity, can be one important part of a plan to avoid financial crisis.
Annuity contracts are offered by insurance companies to help families safeguard their future by guaranteeing a steady cash flow even if they lose their jobs. Each year, more than $200 billion in annuities are purchased in the United States. In this article, we discuss the basics about annuities, the difference between them and other forms of savings.
Annuities are financial products which offer families the opportunity to protect their future
Annuities are used by many individuals to secure a source of income during retirement, protecting a minimum source of cash flow. In most cases, the money comes from payments the individual makes to the insurance company. This process, known as the accumulation phase, can be completed over time through scheduled payments or by making a single lump sum deposit. People who receive large sums of money from a settlement or perhaps won a lottery can buy an annuity contract to turn their earnings into steady cash flow.
Once the accumulation phase is complete, insurance companies start making periodic payments to contract owners in a process known as annuitization. How long payments are set to last is established when the annuity contract is made. For example, individuals can choose to receive payments for a fixed amount of time, or for as long as the contract owner is alive. Annuities that pay retirees until they die are known as life guaranteed contracts. Defined benefit pensions and Social Security are two popular examples of life guaranteed annuities.
In general, annuities can be categorized into fixed and variable contracts. Fixed contracts provide a regular amount of money to the annuitant. For example, a 10-year fixed annuity with a $50,000 accumulated investment and 3 percent annual growth rate will pay out around $500 each month. In a variable contract, annuitants allow insurance companies to invest the accumulated money in their name, receiving larger payments if investments do well and smaller payouts otherwise.
Variable contracts offer the chance to grow investment but at higher risk. However, they are more flexible than fixed contracts, which cannot be modified and have significant penalties if the contract owner decides to withdraw the money ahead of schedule. Some insurance companies allow annuitants to modify their variable contracts to create hybrid fixed-variable annuities. These contracts often include benefits such as guaranteed minimum payments if accumulated investment loses value or the option to accelerate payments when the contract owner is diagnosed with a terminal disease.
Annuities differ from other forms of investment and retirement saving plans in significant ways
Annuities are more similar to life insurance policies than other forms of retirement savings plans. With the exception of contracts made with lump sums of money, fixed annuities and life insurance policies work in similar fashion: policyholders pay monthly premiums in exchange for an amount of money to be paid at a later date or under certain circumstances.
This arrangement makes annuity contracts different from other retirement saving options such as 401(k) and IRAs. The main difference is that annuity contracts can be purchased by anyone, whereas a 401(k) or IRA is only available to company employees. Additionally, annuity contracts have no limits on how much money can be invested annually. Standard retirement accounts such as 401(k) have an annual limit of $18,500 for people under 50 years old, and $24,500 for folks 50 or older. However, both options allow investors to defer tax payments.
When people withdraw money from a 401(k) account, the entire amount is taxable. In contrast, annuitants only have to pay taxes on investment gains, given that the original investment was made with after-tax money. Both retirement options include penalties for early withdrawals. Investors younger than 59 ½ years old are usually charged an extra 10 percent when withdrawing money. However, insurance companies only penalize annuitants’ investment gains, whereas 401(k) holders are charged based on the entire withdrawal.
Single income families can take advantage of annuities when, for example, other retirement plans have been exhausted
The first advantage of annuity contracts is that they can be purchased by anyone. Families who have exhausted other retirement accounts such as 401(k) can put excess money into an annuity contract, deferring taxes and increasing their retirement savings.
Single income families in particular can take advantage of annuity contracts to have a safeguard if they lose their only income source. The ability to withdraw money without a significant penalty gives single parents some relief when protecting their children from financial hardship.
If you are looking for ways to guarantee a future without financial difficulties, annuities may be a good option. Although resources like a 401(k) and IRA are often the first step on the road to retirement, some families do not have access or already exhausted their saving capacity. Annuity contracts offer a reliable alternative for single income families looking for an additional layer of protection against financial hardship.